MAKING NEWS

Tue, 27 October 2009
CBA capital raising sideshow


THE Commonwealth Bank's capital raising was a debacle of the bank's own making.

But aside from marvelling at the sheer incompetence of it all, the real problem is the dawning reality that Australian bank profits are falling fast.

It is galling, to say the least, for CBA to so publicly shoot the messenger in Merrill Lynch, when at issue was the bank's profit and its own obligation to inform the market that bad debt charges were materially higher than previously disclosed.

CBA has lagged the market all year on becoming aware that bad debts would rise and that it should lift capital to combat potential losses.

All year, and even yesterday, the bank was downplaying the need for it to match other banks' tier-one capital levels.

For the record, the bank now has the highest tier-one capital ratio, at 7.5 per cent, just ahead of NAB, which one could take to mean that it, too, realises it has been wrong all year.

And what an extraordinarily ham-fisted way to get there.

On Tuesday afternoon, when Merrill Lynch rang the market trying to raise $1.7 billion for CBA, it did not pass on word that the bad debt charges had risen. This was not disclosed until the money had been raised.

That is a disgrace. ASIC should come down on the banks like a ton of bricks and, arguably, senior executives at the bank should walk or be shown the door.

CBA says Merrill was told to tell everyone, but it was the bank's responsibility to do so.

The bank now says it will sue Merrill Lynch for failing to fulfil its responsibility, but what does the bank plan to do about its own failures?

The latest guidance on bad debts was between 40 and 50 basis points but, not believing the bank, the market consensus was at 53 points and CBA disclosed last night that the real figure was 60 basis points.

The new figure, we are told, only came to light late on Tuesday afternoon due to a reassessment of potential personal loans on one line and, on another, the obvious corporate snafus like Centro, Babcock et al.

Merrill has lost about $12 million in fees and faces certain legal action from CBA.

CBA faces censure and potential penalties from ASIC.

ASIC of course should also look at itself, because once again Tuesday's market defied reality, suggesting manipulation.

All Tuesday there were rumours of a CBA capital raising, yet miraculously the stock outperformed all the banks, jumping 3.92 per cent to close at $29.15 a share.

This made the placement at $27 achievable, but logic would suggest the stock price should have fallen in the face of yet another share issue.

Merrill and CBA had been in contact daily for the past two weeks because the broker was selling shares to manage the $750 million hybrid repurchase.

This was all in the market and still CBA wasn't alert to its continuous disclosure obligations, while its share price was seemingly being manipulated to manage the price. UBS is the only player to have emerged with distinction.

It moved in quickly yesterday morning, picking up about $26 million and Ralph Norris's enduring thanks.

Norris was telling anyone who would listen yesterday that UBS boss Matthew Grounds and his comrades walk on water.

When the investor base revolted over CBA's lack of disclosure, Grounds was on the phone to Norris and his hapless CFO David Craig at 7.30am yesterday offering to help (for a fee), and the due diligence team walked through CBA's doors at 8am.

By 9.15am the papers were signed and Norris had an underwritten deal to raise $1.7 billion.

To sell CBA yesterday, even at a lower price of $26 a share, was a commendable performance.

This was a debacle but at the end of the day, while CBA stuffed up badly, it at least belatedly realised it needed to raise more capital and has done so.

Investors can now look forward to a steady stream of bank profit downgrades, as impairment charges take centre stage for the sector.

Corporate collapses have been around for a year or more, but personal debt starts to look shaky when unemployment rises, and that is next year's reality.

Bowen opens offshore door

ASSISTANT Treasurer Chris Bowen has continued the federal Government's efforts to cut unnecessary regulation by making it easier for foreigners to buy residential real estate.

In changes to FIRB procedures unveiled last night, demands that all foreigners seek prior screening before buying land will be dropped in favour of self-regulation.

Real estate accounts for 92 per cent of all FIRB applications each year, with around 7500 being residential real estate requests.

Marriage went against the grain

THIS year has been one of failed deals with over 37 per cent of announced deals not happening for one reason or another.

The AWB-ABB marriage made in heaven turned out not to be because, it seems, there were just too many issues and too many farmers involved.

The market took the news hard, with AWB being slammed down 12.4 per cent to $2.50 a share while ABB fell 1.9 per cent to $7.36.

The share price movements were a fair reflection of the fact that the market had overvalued the chances of the deal ever happening and, more so, overvalued what it meant for AWB.

Valuations were one issue, with both sides closing in on 55 per cent ABB to 45 per cent AWB, but they were not quite at that point and ABB had started at 58 per cent.

The social issues were said to be done, with ABB chair Perry Gunner to take the top job and AWB's Gordon Davis to move to Adelaide (at least outside the footy season) to run head office.

The trouble was, both companies knew they had to cut down the number of board seats: it's just that everyone thought someone else should go.

AWB investors know first hand how hard it is to get farmers to agree on corporate things, with the tortuous path to constitutional changes only just completed two months ago.

The official line from both sides is that this deal was leaked too early, and by whom depends on what side of the fence you sit. But it was leaked to put pressure on ABB to get moving.

It failed to achieve its objective but, given the history of this industry, no one should rule out the possibility of the deal re-emerging in the new year.

Everyone wants consolidation in the sector and the combination of a merchandiser and a grain handler makes eminent sense and will happen one day.

Locals dance to US jig

HEADING into last night's opening, the US stock market seemed to want to keep rising in the face of yet more bad news.

The bigger than expected Fed interest rate cut, coming ahead of $US2 trillion ($2.9 trillion) in new Treasury issues next year, means the US is facing a flood of liquidity, which has pushed bond yields to record lows.

The greenback finally relented and will keep falling.

Once it digests this news today, the local bourse faces the fun and games of options and futures expiry, which means, given the market is long physical shares and short on futures, prices should fall.

Now is not the time for such logical predictions, but it is certain that volume this morning will be huge.



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